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Here is an excerpt from our trading plan.
Snapback rally? How high?
Even if the current sell-off is really a down trend and not a short-term political sell-off, it is unlikely that $SPX $NDX will just drop straight down to December 24 low without a substantial snapback rally first.
During the down trend last fall, $SPX $NDX $RUT all went through a sequence of Drop1/Bounce1, followed by Drop2/Bounce2. This happens between October 1 and November 7, before Drop3/Bounce3, Drop4/Bounce4 and finally Drop5 (between December 12 and December 24).
So far, $SPX $NDX $RUT have gone through a Drop1/Bounce1, and are in the midst of a Drop2 sequence right now. The odds are high that we will see a Bounce2 after Drop2 is done.
We want to show you a couple tables below to compare the current Drop/Bounce sequence with the Drop/Bounce sequence of last fall, during the down trend.
The most important column to examine is the last one highlighted in blue. It shows how high $SPX $NDX can potentially get up to during the Bounce2 sequence.